We'll define and explore each of these elements in depth in future articles. For now, let's discuss here how they are used in developing your investment strategy.

First, these elements are generally best applied to the examination of an entire type or class of investments, not to an individual investment vehicle. For instance, you would use them to determine whether growth stocks in general have a place in your portfolio, not whether you should invest in say, Growcorp, Inc.

To begin, build a matrix which includes all nine elements, and rate each element on a scale from zero to ten. In this case, a "zero" would mean that this investment rates poorly with respect to this element; while a "ten" would mean that this element is quite favorable in the investment. Obviously, the maximum score for an investment is 90.

The matrix below rates a passbook savings account:

The Elements of an Investment - Introduction

Risk	Liquidity	Appreciation
Management	Cash Flow	Leverage
Flexibility	Rate of Return	Taxes

As you can see, this investment (with a total score of 42) carries almost no risk, is extremely liquid but provides no capital appreciation. This rating would be true for all passbook savings accounts covered by FDIC insurance up to $100,000. Whether this type of investment is right for you (and whether you should seek an investment with a higher or lower total score) depends on how these elements fit with your overall investment strategy.

For instance, are you in the accumulation mode of your financial life cycle? If so, your investment strategy probably requires investments with higher risk (a lower risk rating), greater return and more capital appreciation. Further, you may be better able to handle the use of leverage, an element not present in a savings account investment.

Conversely, if you are in the distribution stage of your wealth cycle, the low risk and greater liquidity of this investment might make it more attractive to you. You no longer need appreciation, and the taxation associated with a savings account is less of a factor.

The elements of an investment are a personalized method for determining which investments are suitable for you. Use them to help select new investments for your portfolio. In addition, as you journey through your investment life, remember to use this tool periodically to ensure that your existing portfolio continues to meet your changing needs.

"…really choosing the kinds of
investments that fit…"

Passbook Savings
Elements		Rating
Risk	0 - 10	10
Management	0 - 10	9
Flexibility	0 - 10	8
Liquidity	0 - 10	8
Cash Flow	0 - 10	4
Rate of Return	0 - 10	3
Appreciation	0 - 10	0
Leverage	0 - 10	0
Taxes	0 - 10	0
Total	0 - 90	42

It's time to make a decision. If you've journeyed this far into what we call the "Investment Way of Life", you have accomplished a great deal. You've taken your first steps–committing to a goal and establishing the four cornerstones of success. Through your program, discipline, patience and time you have begun to save. You've examined the four priorities of life and your position in the wealth cycle. So what's next?

It's time to begin choosing the investments that you believe will help you fulfill your ultimate goal—financial freedom. In fact, you've probably already made at least one choice by deciding where to put that first dollar you saved. Most likely, you chose an extremely liquid investment such as a passbook savings account or money market fund. And that decision was probably less a choice than an instinctive reaction.

For those of you who are farther along in your investment career, you may already have a portfolio comprised of a variety of investments–and you are wondering if some of those choices are appropriate. In either case, you are ready to begin examining other investment alternatives, really choosing the kinds of investments that fit your overall strategy. To help you decide, begin by analyzing the nine elements of an investment:

Select Additional Articles from Jerry's Corner The Investment Way of Life Four Cornerstones of Success Excuses... More Excuses The Wealth Cycle Investment & the Wealth Cycle An Economics Primer The Life Cycle Creating A Saving Culture Entrepreneurialism A Fortune in Your Hands Look to the Pros - Introduction - Part I - Insurance - Part II - Stock Broker - Part III - Real Estate - Part IV - Attorney - Part V - CPA The Priorities of Life - Introduction - Part I - Health - Part II - Career - Part III - Relationship - Part IV - Home Elements of Investment - Introduction - Part I - Risk - Part II - Management - Part III - Flexibility - Part IV - Liquidity - Part V - Cash Flow - Part VI - Rate of Return - Part VII - Appreciation - Part VIII - Leverage - Part IX - Taxes

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